Batm Advanced Regulatory News (BVC)

7 August 2014

BATM Advanced Communications Limited

("BATM" or the "Group")

Interim results for six months ended 30 June 2014

Moves into net profit through tight control over operating expenses

BATM Advanced Communications Limited (LSE: BVC; TASE: BATM), a leading provider of real-time technologies for networking solutions and medical laboratory systems, announces its interim results for the six months ended 30 June 2014.

Financial Summary

· Group revenue of $56.7m (H1 2013: $56.8m)

· Gross profit of $18.9m (H1 2013: $20.2m) - gross margin of 33.2% (H1 2013: 35.6%)

· Gross operating profit of $0.4m (H1 2013: $0.08m)

· Net profit for the period was $0.2m (H1 2013: $1.7m net loss)

· Earnings per share of 0.10¢ (H1 2013: 0.32¢ loss per share)

· As at 30 June 2014, the Group had cash and cash equivalents and deposits of $36.1m (31 December 2013: $40.8m; 30 June 2013: $44.5m) mainly due to increased working capital

Operational Summary

· Increased sales in second quarter 2014 compared with first quarter 2014 (Q2 2014: $28.9m; Q1 2014: $27.8m)

· In the first half of 2014, Medical division revenues grew by 18% offsetting the 15% decline in revenues of Telecom division compared with equivalent period last year

· Medical division (H1 2014: 53% of total Group sales; H1 2013: 45%):

o Continued strong momentum in the first half of 2014, resulting in two of the division's three businesses reaching profitability

o Distribution Unit:

§ Growth in revenues of 25% compared with H1 2013

o Pathogenic Waste Treatment Sterilisation Unit:

§ Growth in revenues of 33% compared with H1 2013 as a result of increased sales to existing customers and first sales into Myanmar

§ Completed move to a larger facility in order to process the increase in demand

o Diagnostics Unit:

§ Returned to growth as sales improved by 8% compared with H2 2013 (6.2% lower than H1 2013)

§ Contract awarded by the Ministry of Health in a major Latin American country to replace the incumbent supplier and provide its closed system immune diagnostics instruments and reagents to detect tumour markers

§ Commenced process to automate production of reagents to improve capacity

· Telecom division (H1 2014: 47% of total Group sales; H1 2013: 55%)

o Continued focus on the new strategy of concentrating on Tier 1 clients, SDN (Software Driven Networks) and NFV (Network Function Virtualization)

o Two new contracts awarded to provide telecommunications solutions to service providers in the US for the upgrade of existing networks

o Deployed a contract to supply an intelligent internet protocol surveillance solution at UK's London Borough of Islington's new CCTV control and command centre located just outside London

o Roll out of the previously reported fiber network initiative with the Israeli Broadband Company ("IBC") continued, and the initial customers have been connected

· Post-period development

o The Group's cyber unit, CELARE, signed a collaboration contract with one of the world's largest software companies to integrate its cyber solution with the big data solution of that company. A pilot contract from a major customer awarded at the end of July 2014 for the integrated solution

Dr Zvi Marom, Chief Executive Officer of BATM, said: "We are pleased to report continuing revenue growth in the second quarter compared with the first quarter of 2014, and a significantly improved level of operating profitability compared with the interim stage of last year. Revenue for the year to date is broadly similar to the first half of last year in line with our expectations.

"We are pleased that the Medical division is growing well and that the Telecom division is also demonstrating some increased traction as the new strategy introduced last year begins to deliver.

"Looking ahead, the momentum of the first half has continued into the second half, particularly in the Medical division. As a result of this, combined with sustained control over operating expenses, the Group expects to report full year 2014 revenues and profits in line with market expectations."

Enquiries:

Operational Review

During the period, the Group achieved solid progress across all of its business units. Second quarter performance was higher than the first quarter of 2014, especially in the Medical division, resulting in revenues for the first half of 2014 to be $56.7m (H1 2013: $56.8m). The Medical division accounted for 53% of total Group sales with the contribution from the Telecom division being 47%.

In H1 2014, revenues in the Medical division were 17.9% higher than the comparable period last year at $30.2m (H1 2013: $25.6m). The gross profit margin was similar to H1 2013 at 23%. Operating loss, excluding amortization of intangible assets, was $1.0m in H1 2014 compared with an operating loss of $1.4m during H1 2013.

The Distribution unit contributed approximately 61.4% of Medical division revenues in H1 2014 compared with 58% of revenues in H1 2013. In absolute terms, the unit's revenues grew organically in all territories, including an initial contribution from its new opportunity in Myanmar. Margins in H1 2014 were essentially the same as the first half of 2013. As a result, the distribution unit generated an operating profit for H1 2014 compared with a small operating loss in H1 2013.

The Pathogenic Waste Treatment Sterilisation unit accounted for 17% of the Medical division's revenues in H1 2014 compared with 15% of revenues in H1 2013. In addition, the unit achieved operating profit for the first six months of 2014 compared with an operating loss in H1 2013. This was primarily due to growth in sales to existing customers resulting from increased manufacturing capacity following relocation to larger facilities during H1 2014. Additionally, there were sales from new territories such as Myanmar. The unit continues to focus on the treatment of biological waste, based on unique patented technology, including the launch of a new version of a smaller Integrated Sterilizer and Shredder ("ISS") designed for dialysis.

The Diagnostics unit represented 21.6% of Medical division revenues compared with 27% during the first half of 2013. Operating losses in H1 2014 were higher than H1 2013. However, the unit returned to sequential growth - reporting revenues 8% higher in H1 2014 compared with H2 2013. The Diagnostics unit was awarded a contract by the Ministry of Health in a major Latin American country to replace the incumbent supplier and provide the Group's closed system immune diagnostics instruments and reagents for tumour detection markers to laboratories throughout the country. As set out in the Group's outlook below, the Diagnostics unit has a backlog of orders and expects an increased level of orders from China during the second half of the year.

Telecom Division

In H1 2014, there was a $4.7m decrease in revenues to $26.4m compared with $31.1m in H1 2013. Gross profit margins were 45% compared with 46% during H1 2013.

Operating profit, excluding amortization of intangible assets, for the first half of 2014 was $1.5m (H1 2013: $1.5m). Lower spending on research and development was mostly due to a re-focused effort towards a new solution for the Tier 1 service provider market and a higher contribution from the Israeli Chief Scientist (H1 2014: $0.6m; H1 2013: $0.3m).

In May 2014, the Group's Telecom business was awarded a contract to supply an intelligent internet protocol surveillance solution at UK's London Borough of Islington's new CCTV control and command centre located in greater London. It will bring together more than 1,000 cameras across Islington to a single centre that will be continuously monitored and will allow live or recorded footage to be made instantly available to devices such as laptops, tablets and smartphones.

In June 2014, the division won two contracts to provide state-of-the-art telecommunications solutions to service providers in the United States for upgrades to existing networks. The first was to deliver its solutions based on Multiprotocol Label Switching (MPLS), a mechanism for high-performance telecommunications networks, including the T-Metro 8001 aggregation platform and Edge Genie management system, to a service provider focusing on interactive voice and IP telephony services for both large and small enterprises.

The second contract was with a local service provider in Louisiana where the Group is the prime vendor in a project to provide 165 schools in the southern part of the state with 10GE network connections. In addition to its aggregation platforms and management system, the Group is providing its latest network interface device, the T-Marc 334S.

The Group's investment into the consortium for the construction of a new fiber optic network in Israel, under the IBC, is progressing well. As planned, the consortium has started the rollout of the network and connected its first trial customers in the north of Israel.

Post-period development

In July 2014, the Group's cyber unit, CELARE, established a joint collaboration and marketing agreement with a major US software company (the "Partner") for the implementation and integration of a cyber security monitoring and detection solution for large enterprises. Under the terms of the agreement, CELARE and the Partner will offer an integrated network-based cyber protection system combined with Big Data appliances and software tools. In addition, a major customer has awarded CELARE a proof of concept ("POC") cyber security contract for the combined solution. CELARE will integrate its cyber switches and software with the Partner's Big Data appliances and other software tools. The POC contract has an initial value of at least $0.5m and will end during early 2015. BATM anticipates that the Partner will commence offering the solution to selected customers that use their Big Data products from Q4 2014.

Revenues in the first half of 2014 decreased by $0.1m to $56.7m (H1 2013: $56.8m). Medical division revenues increased by 17.9% to $30.2m (H1 2013: $25.6m) whilst Telecom division revenues decreased by 15.1% to $26.4m (H1 2013: $31.1m).

The blended gross profit margin for the first half of 2014 was 33.2% (H1 2013: 35.6%), which was 2.4% lower than the gross profit margin in the second half of 2013. This decrease is mostly due to a higher contribution to total revenues from the Medical division (H1 2014: 53%; H1 2013: 45%). The Pathogenic Waste Treatment Sterilisation unit achieved an improvement in gross margin, but margins were lower in the Diagnostics unit due to the delivery in H1 2014 of a large order containing certain lower-margin instruments. The Group anticipates follow-on orders for higher margin reagents during H2 2014 and beyond.

Sales and marketing expenses were $7.9m (H1 2013: $8.6m), representing 14% of revenue compared with 15.1% in the first half of 2013.

General and administrative expenses were $5.7m (H1 2013: $5.4m), representing an increase compared with the same period of last year. This increase reflects higher expenses, mostly due to a one-time allowance of $0.4m for doubtful debts in the diagnostics unit of the Medical division.

R&D investment in the first half of 2014 decreased to $4.8m (H1 2013: $6.2m). This decrease of $1.4m was primarily due to a change in the focus of R&D towards a new solution for Tier 1 service provider clients and also as a result of a higher contribution from the Israeli Chief Scientist (H1 2014: $0.6m; H1 2013: $0.3m).

Net finance expense was $0.07m (H1 2013: $0.5m).

Net profit after tax attributable to equity holders of the parent amounted to $0.4m (H1 2013: $1.3m loss), resulting in a basic profit per share of 0.10¢ (H1 2013: loss of 0.32¢).

The Group's balance sheet remains strong with effective liquidity of $36.1m, a decrease of $4.7m compared with $40.8m as at 31 December 2013. The decline in cash balances is mainly due to an increase in non-cash working capital.

Inventories increased to $24.8m (31 December 2013: $23.1m). The increase is due to a higher level of inventory in the Telecom division, which is expected to decline during H2 2014 and beyond.

Trade and other receivables increased to $37.2m from $33.6m at the end of 2013 mostly due to a higher contribution from the Israeli Chief Scientist and an increase in prepaid expenses.

Period end cash is comprised as follows: cash and deposits up to three months duration of $9.6m and short-term cash deposits up to one year of $26.5m.

Intangible assets and goodwill decreased to $17.6m (31 December 2013: $18.2m). The decrease is due to the amortization of intangible assets.

Property, plant and equipment decreased to $20.4m (31 December 2013: $20.9m). The decrease is due to the amortization of property, plant and equipment.

The balance of trade and other payables remained the same as at the end of 2013.

The Group continues to progress as expected with the Medical division playing a dominant role as the Telecom division focuses on turning around as a result of the new strategy introduced last year.

The momentum achieved in the first half has continued into the second half of the year, particularly in the Medical division. The Telecom division has stabilised under a new management team and is making good progress with the new strategy.

In the Medical division, it is expected that the Distribution unit will maintain the growth it has seen in the early part of the year and the Pathogenic Waste Treatment Sterilisation unit will continue to increase sales as a result of greater capacity and penetration into new territories. The Diagnostics unit, following the award in Latin America and several other important contract wins during the first half, now has a very strong backlog for reagents for the second half. However, due to constraints in production capacity, the Diagnostics unit will be unable to fulfil all the orders in 2014. Additional equipment to increase the capacity of the production line is being installed, which is expected to double production capacity in 2015. In addition, following a new management focus on South East Asia, especially China, and the adoption of a different distribution channel, several new reagents are expected to be approved in H2 2014 that the Directors believe will result in significantly higher revenues from this region in H2 2014.

As a result of this and continuing control over operating expenses, the Group expects to report full year 2014 revenues and profits in line with market expectations.

BATM ADVANCED COMMUNICATIONS LTD.

CONSOLIDATED INCOME STATEMENTS

BATM ADVANCED COMMUNICATIONS LTD.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

BATM ADVANCED COMMUNICATIONS LTD.

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

BATM ADVANCED COMMUNICATIONS LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

Six months ended 30 June 2014

Six months ended 30 June 2013

BATM ADVANCED COMMUNICATIONS LTD.

CONSOLIDATED STATEMENT OF CASH FLOWS

BATM ADVANCED COMMUNICATIONS LTD.

APPENDICES TO CONSOLIDATED STATEMENT OF CASH FLOWS

APPENDIX A

RECONCILIATION OF OPERATING LOSS FOR THE PERIOD TO NET CASH

FROM (USED IN) OPERATING ACTIVITIES

BATM ADVANCED COMMUNICATIONS LTD

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Basis of preparation

The interim consolidated financial statements of the Company have been prepared in conformity with International Accounting Standard No. 34 "interim financial reporting" (hereafter "IAS 34").

In preparing these interim consolidated financial statements, the Company implemented accounting policies, presentation principles and calculation methods identical to those implemented in preparation of its consolidated financial statements as of 31 December 2013 and for the period ended on that date. The condensed interim financial statements should be read in conjunction with the annual financial statements for the year ended 31 December 2013, which have been prepared in accordance with IFRSs.

Application of new and revised International Financial Reporting Standards (IFRSs)

For information regarding application of new and revised International Financial Reporting Standards, see Note 2 in the annual financial statements of the Company as of 31 December 2013 and for the period ended on that date,except for the following:

▪ The IFRS 15 "Revenues from Contracts with Customers"

The core principle of the standard is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

The new standard indicates that an entity should perform the following five steps in recognizing revenue:"Identify the contract (s) with a customer" (step 1)."Identify the performance obligations in the contract" (step 2)."Determine the transaction price" (step 3)."Allocate the transaction price to the performance obligations in the contract" (step 4)."Recognize revenue when (or as) the entity satisfies a performance obligation" (step 5).Entities are also required to provide significantly expanded disclosures about revenue recognition, including both quantitative and qualitative information about (1) the amount, timing, and uncertainty of revenue (and related cash flows) from contracts with customers; (2) the judgment, and changes in judgment, used in applying the revenue model; and (3) the assets recognized from costs to obtain or fulfill a contract with a customer.

An entity shall apply this Standard for annual reporting periods beginning on or after 1 January 2017. Earlier application is permitted. If an entity applies this Standard earlier, it shall disclose that fact.

At this early stage, the management of the company is unable to estimate the effect of this standard on its financial position and results of operations.

 BATM ADVANCED COMMUNICATIONS LTD

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 2 - Profit/(loss) per share

Profit/(loss) per share is based on the weighted average number of shares in issue for the period of 403,141,538 (H1 2013: 403,014,301). The number used for the calculation of the diluted profit per share for the period (which includes the effect of dilutive stock option plans) is 403,185,660 shares (H1 2013: 403,014,301).

Note 3 - Disposal group classified as held for sale

During June 2012, the Company entered into a MOU agreement to dispose of its older time division multiplexing (TDM) based products ("Legacy") business, which formed part of the Group's Telecom operations. This event, which was completed during the six month period ended 30 June 2013, is consistent with the Group's long-term policy to focus on growing the Carrier Ethernet portfolio. 

During the first half of 2013, the Group completed the sale of the legacy business excluding one of the product lines that re-integrated back into the Group's portfolio. This product line was previously classified as discontinued operation.

BATM ADVANCED COMMUNICATIONS LTD

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 4 - Segments

Business Segment

* Excluding other operating expenses